Stimulus Ending Tells HSBC ABS Buyers Must Steel for Lower Gains
The rally in asset-backed securities which sent costs to a five-year low is over and investors should steel for lower returns after Federal Reserve Chairman Ben S. Bernanke signaled an end to U.S. stimulus, according to HSBC Holdings Plc.
“We look at ABS through a risk-return lens and Bernanke’s comments have probably changed the return side of that equation quite dramatically,” Andrew J. Jackson, the head of trading and portfolio management for ABS at HSBC Global Asset Management, said yesterday at IMN’s Global ABS conference in Brussels. “I suspect we might be in for a period of volatility.”
Investors are pulling money out of riskier assets after Bernanke said the Fed may moderate bond purchases this year and end the program in 2014 should risks to the U.S. economy abate. European debt risk rose 12 basis points yesterday by the close of London trading, the biggest one-day gain since November 2011, while 10-year Treasury note yields are poised for the biggest weekly advance in two years.
More than $19 billion exited emerging-markets funds in the three weeks to June 12, the most since 2011, according to EPFR Global.
Spreads on sterling asset- and mortgage-backed bonds widened three basis points yesterday to 151 basis points, near the highest level in two months, a Bank of America Merrill Lynch index shows. The notes lost 1.94 percent in May, the most since January 2009.
U.K. prime residential mortgage-backed securitization, traditionally Europe’s largest ABS market, will slump 73 percent this year, Barclays Plc wrote in an April report, before more than $2.2 trillion was wiped from stock markets globally. European RMBS is forecast to fall 50 percent, Barclays said.
Despite yesterday’s uptick, yield premiums remain near a five-year low of 140 basis points reached last month, the Bank of America Merrill Lynch’s index shows, as the Bank of England’s Funding for Lending Scheme weighs on new sales.
The FLS program, established last July, aims to boost lending in the U.K. by offering banks and building societies financing at a price and quantity that’s linked to their lending performance.
“When the Bank of England publishes their usage stats for FLS, if you’re seen to be playing and are increasing your lending, you basically get a free advert in the newspapers,” Rob Collins, the head of funding at Nationwide Building Society, said at the conference in Brussels.
Nationwide Building Society, the world’s largest with about 15 million members, has not however been a particularly aggressive user of the scheme, Collins added.
Liquidity from the European Central Bank is also discouraging issuance around the region, according to Felix Blomenkamp, head of the European ABS team at Pacific Investment Management Co., manager of the world’s biggest bond fund.
“With all the ECB funding available as well as limited issuance due to the fact banks don’t need funding, there’s a risk the market isn’t really coming back,” he said at the forum in Brussels. “There’s not enough new issuance to establish a fully functioning market again.”
Only three issuers have sold prime U.K. RMBS this year, including Santander U.K. Plc, data compiled by Bloomberg show. Santander U.K. is planning a similar-sized transaction for the second-half of the year, according to Tom Ranger, its head of structured funding.
Leeds Building Society could also capitalize on the lack of supply to sell its first publicly-offered deal, Paul Riley, the regional lender’s group treasurer, said in an interview on June 19. A sale could take place in the next 12 months, Riley said.
“It would be very helpful if we could get some more primary issuance out there in order to stabilize the market,” HSBC’s Jackson said. It’s “shrinking” at the moment.
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